Cryptocurrency expert tells court IRS 'fishing expedition' violates privacy rights

Signage is seen at the headquarters of the Internal Revenue Service (IRS) in Washington, D.C., U.S., May 10, 2021. REUTERS/Andrew Kelly
  • 1st Circuit considers whether Coinbase user can challenge IRS information seizure
  • Plaintiff is non-resident fellow with the American Enterprise Institute

A federal appeals court on Wednesday signaled it may allow a bitcoin user to challenge the Internal Revenue Service's seizure of his financial information from Coinbase Global Inc and other virtual currency exchanges, in a case that could have broad implications for cryptocurrency tax probes.

Members of a three-judge panel of the 1st U.S. Circuit Court of Appeals in Boston sharply questioned why, under a recent U.S. Supreme Court decision, cryptocurrency expert Jim Harper was barred from pursuing his lawsuit accusing the IRS of violating his privacy rights.

Harper is a lawyer and non-resident fellow with the American Enterprise Institute and former global policy counsel for the Bitcoin Foundation. He sued the IRS in 2020 after the agency sent him a letter saying it had obtained information suggesting he may not have properly reported cryptocurrency transactions on his tax returns.

He was one of thousands of taxpayers who received such letters after the IRS in 2017 won a ruling to enforce so-called "John Doe" summons against Coinbase and get access to transaction records belonging to its customers.

"They said let's go on a fishing expedition, let's ask Coinbase for information on hundreds of thousands of taxpayers," said Richard Samp, a lawyer for Harper at the New Civil Liberties Alliance told the panel on Wednesday.

Samp said the IRS's information gathering method violated Harper's due process and privacy rights under the U.S. Constitution's 4th and 5th Amendments.

But U.S. Justice Department attorney Kathleen Lyon contended that a lower-court judge correctly tossed Harper's case under the Anti-Injunction Act, which bars lawsuits to restrain the "assessment or collection" of taxes.

Samp, though, said Harper's lawsuit was challenging not a tax assessment but rather the IRS' information gathering techniques, something the Supreme Court in May allowed in CIC Services LLC v. Internal Revenue Service.

U.S. Circuit Judge Kermit Lipez told Lyon that under the ruling's "clear" language, "your position is not defensible."

"We're involved with perhaps a prelude to an act of assessment but not the act of assessment itself," he said.

U.S. Circuit Judge William Kayatta said while the IRS "understandably" wanted to gather information to decide whether to assess a tax, it had yet to actually assess one.

Lyon warned that a ruling against the IRS could open the floodgate to other lawsuits by taxpayers under audit.

"There's nothing to keep that from happening," she said.

The case is Harper v. Retting, 1st U.S. Circuit Court of Appeals, No. 21-1316.

For Harper: Richard Samp of the New Civil Liberties Alliance

For the United States: Kathleen Lyon of the Department of Justice

Read more:

Crypto user asks 1st Circuit to curtail IRS collection of records

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Nate Raymond reports on the federal judiciary and litigation. He can be reached at nate.raymond@thomsonreuters.com.